My second top pick in the Industrial sector is 3M Company (MMM). This is one the leading industrial companies in the U.S. and world, asserts Prakash Kolli, income specialist and editor of Dividend Power.
3M has consolidated its segments to Safety & Industrial (35% of revenue) — which makes tapes, adhesives, abrasives, and personal safety equipment; Healthcare (23% of revenue) — which makes medical and surgical products; Transportation & Electronics (30% of revenue); and Consumer (16% of revenue) — which makes office supplies, home improvement items, and consumer health care.
3M has many well-known brands including Post-its, Scotch, Filtrete, Tegaderm, ACE, Scotchgard, Scotch-Brite, Command, and Nexcare.
3M has struggled since about 2018 due to a variety of issues including the U.S. and China trade war, tariffs, and a slowdown in China’s automotive market.
The company was also adversely affected during the initial stages of the pandemic due to local government restrictions and extended shutdowns of industries, manufacturing plants and offices, closure of dental offices, and low volumes of elective surgeries.
However, COVID-19 headwinds abated in the third quarter as global economies restarted. Major end markets including automotive, electronics, and health care recovered rapidly driven be pent up demand and stimulus. COVID-19 is still driving sales of personal safety equipment and N95 respirators.
As a supplier to many other manufacturers 3M often feels the effects of a slowdown early. But this means that 3M is well positioned to benefit when global economies rebound. More stimulus, especially in the U.S., and the approval and distribution of vaccines are positive for global economies that should benefit 3M.
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The company has been improving capital allocation and use of debt. This is after a period of time when debt grew to fuel share repurchases and also the $6.7 billion acquisition of Acelity. Net debt peaked at $18,848 million at end of Q1 2020 with a leverage ratio over 2.1X. Net debt declined to $15,889 million at end of Q3 2020 with a leverage ratio of 1.6X.
3M is one of only nine companies to have paid a growing dividend for 60+ years. The company has paid a dividend for over 100+ years without interruption. The current payout ratio is about 69%, which near my target threshold of 70%, but this is based of reduced earnings during the pandemic.
On a negative note, lawsuits related to PFAS are an overhang on the company. 3M phased these chemical out of its products starting in the early-2000s. The exact cost of the lawsuits is unknown but will likely be a few billion dollars.
The stock is fairly valued trading at a price-to-earnings ratio of about 20.5X compared to 20.9X over the trailing 5-years but again this is based on earnings impacted by the pandemic. The current yield is about 3.4% and higher than the average over the past 5-years. I view the stock as a long-term buy.